Reforming Small Electricity Systems: Market Design and Competition

The financial viability of electric utilities in sub-Sahara Africa (SSA) is a central energy policy issue. This follows a persistent under-recovery of costs despite having some of the highest electricity prices in the world. However, discussions on electricity price-cost margins often focus on the revenue aspects and tariff and utility reforms, but inadequately on costs and broader sector reforms. Through a synthesis of reform theories and case studies and using small electricity systems as a surrogate for liberalised sectors without competitive markets, this paper examines the connection between sector reforms and costs. It brings economic perspective to financial performance in SSA electricity systems and the need for a holistic approach for cost-recovery. We recommend the promotion of mobile power plants to facilitate contestability in generation and competitive procurement of new capacity to lower costs. Small systems should participate in regional power markets to neutralise the scale limitations of autarkic demand, and form platforms to share information on cost opportunities to inform procurement designs and regulatory benchmarks. Regional markets could partner with governments to develop subsidy schemes such as contracts for differences to remove rigidities in national power purchasing contracts to promote participation of small systems in regional markets. Yardstick competition in the distribution segment is viable in small electricity systems and should be pursued.